3 Things to Never Do With Your Tax Refund If You're Considering Bankruptcy

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If you’re deep in debt, you may be applying every spare penny to dealing with your creditors. And if you usually get a hefty tax refund, you may use that to pay on your debts as well. But if your debt situation is dire and you’re considering bankruptcy, there are some things that you may not want to do with your tax refund (or other cash windfall such as a bonus) because it will do more harm than good:

#1 Don’t Pay Off Your Car Loan

In North Carolina, you can exempt up to $3,500 of equity in your vehicle. Equity is the value of your car less what you owe. If your car is valued at $8,000 and you owe $4,500, this means you have $3,500 of equity and it should be exempt. If your work bonus or tax refund is $3,000 and you apply this to your car loan, this will increase your equity to $6,500 and put it beyond the exemption limits. This could result in seizure of your vehicle to satisfy your creditors.

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#2 Don’t Pay Back a Loan or Give Money to a Family Member

When you’re considering bankruptcy, you need to consider carefully your interactions with family members in the 12 months prior to filing your petition. 11 USC 101, section 32 of the US bankruptcy code defines an “insider” as “a relative of the debtor.” If you pay back or give money to an insider within 12 months of the filing, the Trustee in your case can actually demand that the recipient turn the money over to the court to use to pay your creditors. This will likely produce more of a rift than the loan itself, so be cautious in this respect!

#3   Don’t Pay Down Any Unsecured Debt

If you’re serious about filing bankruptcy and truly need the debt relief it offers, using your work bonus or tax refund to pay off a debt that will be discharged in your bankruptcy doesn’t make sense. If you stash it in the bank, you may be able to protect up to $5,000 using North Carolina’s wildcard exemption. This can be a safety net to get you off to a good start after your debts are discharged in bankruptcy. But if you really want to apply your windfall to debt, put it toward non-dischargeable debt such as student loans.

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Protect Yourself in Bankruptcy

If you’ve got some cash coming in – from a tax refund, bonus at work or other source – and it’s not enough to get you out of your debt dilemma so bankruptcy is still your best bet, you need to think wisely about what you will do with your windfall. Consult an experienced North Carolina bankruptcy attorney like John T Orcutt for advice on how to best protect yourself during the bankruptcy process. Contact our offices now for a free consultation.